January Inflation Numbers

The CPI for January showed an annual rate of 1.8%, up 0.5% from December. The market had expected a 0.3% increase, according to Reuters. Across December to January prices fell by 0.3%, whereas they dropped by 0.8% a year ago.

The CPI/RPI gap was unchanged at 0.9%, with the RPI annual rate rising to 2.7%. Over the month, the RPI was down 0.4%.

The Office for National Statistics’ (ONS’s) favoured CPIH index rose 0.4% for the month to 1.8%. The ONS notes the following significant factors across the month:

Upward

• Housing and household services: The largest increase came from this category. In January 2019, a fall in gas and electricity prices partially reflected energy providers beginning to operate Ofgem’s initial energy price cap. There was no such Ofgem adjustment this January because of a change in the timing of new pricing caps. These now take effect on 1 April and 1 October. The 0.2% inflation increase in gas and electricity bills created this month by the January 2019-January 2020 comparison will disappear in February, and in April energy prices will bring downward pressure on inflation because the cap rose by 9.3% in April 2019 but will drop by 1% in April 2020.
• Transport: The main upward contributions came from fuels and lubricants, and airfares. Prices at the pump rose between December 2019 and January 2020 but fell between December 2018 and January 2019. There was also a large upward contribution from airfares where prices fell between December 2019 and January 2020 by 17.9%, compared with a fall of 25.5% a year earlier. There were further small upward contributions from vehicle maintenance and repairs, and other services. These upward contributions were partially offset by small downward contributions from rail and sea fares and the purchase of vehicles.
• Clothing and footwear: This category also made a large upward contribution to the change in the inflation rate, with the main impact coming from women’s clothing. There was no evidence to suggest a reduction in the proportion of items being recorded on sale compared with January 2019, despite evidence of increased discounting reported in December 2019.
• Restaurants and hotels: Overall prices for overnight hotel accommodation fell by 3.9% between December 2019 and January 2020, compared with a fall of 9.1% between December 2018 and January 2019.

Downward

• Furniture, household equipment and maintenance: Overall prices fell by 3.1% between December 2019 and January 2020, compared with a fall of 2.1% between December 2018 and January 2019. The main downward movement came from furniture and furnishings, in particular from settees and double beds.
• Food and non-alcoholic beverages: Overall prices fell by 0.1% between December 2019 and January 2020, compared with a rise of 0.1% a year earlier. There were downward contributions from margarine or low-fat spread; fish; fruit; and fruit squash. These were partially offset by upward contributions from bread and cereals; and sugar, jam, syrups, chocolate and confectionery. CPI inflation in this category is now 1.5%.

Overview

In six of the twelve broad CPI groups, annual inflation increased, while three categories posted a decrease and the remaining three were unchanged. The category with the highest inflation rate remains in the Communications category, which fell 0.1% to 4.2%.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) rose 0.2% to 1.6%. Goods inflation rose 0.7% to 1.3%, while services inflation was up 0.2% at 1.6%.

Producer Price Inflation was +1.1% on an annual basis, up 0.2% on the output (factory gate) measure. Input price inflation increased to 2.1% year-on-year, a 1.2% rise from December. The main driver here – for a change – was imported metal prices, not oil prices (which were the main driver for the output inflation rise).

These inflation figures were higher than expected, but the quirks of energy price capping mean this could be a temporary blip rather than an omen of the end of sub-2% inflation. With earnings growth of 2.9% a year (total pay – 3.2% regular pay only) according to the latest statistics, real earnings growth continues to be positive.

These inflation numbers to some extent vindicate the Monetary Policy Committee’s no change decision on 30 January. The MPC next meets on 25/26 March, by which time it will have another set of inflation statistics and the impact of the Budget to consider.